Causes and Consequences of Shareholder Activism

Abstract

This dissertation is comprised of two essays that examine the causes and consequences of shareholder activism. In the first essay, we examine five different types of evidence to determine whether interventions by activist investors increase shareholder value. We find short-window returns around the announcement of an activist share purchase are sizable and do not reverse in a two-year, post-intervention period. The increase is greatest for demands to sell all, or part, of the target firm but is still significant for other demands. Many critics of activism maintain the market is being misled. We therefore investigate how market participants who invest heavily in information respond, since they are likely to be knowledgeable about the long-term impact of activism. Despite an often sizable price increase around the activist announcement, analyst buy recommendations increase, short interest declines, and accounting fundamentals improve. Most importantly, ownership by long-term (“dedicated”) institutional investors increases. All five types of evidence indicate that activist interventions increase long-term shareholder value.

In the second essay, I examine how business press coverage influences shareholder activists’ targeting decisions and subsequent campaign announcements. Leveraging predictions from prior theory, I posit and find that activists are most likely to target firms with high levels of total media coverage, especially negative media coverage. I also argue that activists may target firms with high media coverage to increase the likelihood that their campaign receives media coverage. I find consistent evidence that pre-intervention press coverage is positively related to the likelihood and the level of press coverage of an activist campaign announcement. Finally, I find evidence of one benefit that higher media coverage conveys to activists who are successful in gaining coverage of their campaign announcements, namely, higher announcement returns. Together, these findings shed light on important determinants and consequences to shareholder interventions.